U.S. inflation slowed in May, supporting the case for Federal Reserve officials to pause their run of interest-rate hikes this week.
Both the consumer price index and the core CPI — which excludes food and energy — decelerated on an annual basis, highlighting inflation’s descent since peaking last year. At 4%, year-over-year inflation is now at its lowest level since March 2021, according to data out Tuesday from the Bureau of Labor Statistics.
That said, a key gauge of prices closely watched by the Fed continued to rise at a concerning pace. The core CPI rose 0.4% for a third straight month, in line with estimates. The overall CPI, however, increased a smaller 0.1%, aided by lower gasoline prices.
The outsize increases in core prices were driven mainly by rising rents and by another spike in used car prices. Real-time data suggests that increases in those categories will soon ease and help cool inflation.
“Outside of those two components, the trend has become very encouraging,” Stephen Juneau, an economist at Bank of America, said in a research note. “We should continue to see improvement in core” prices.
The inflation figures come just a day before the Fed is set to make a decision on whether to raise interest rates for an 11th-straight meeting or to pause and further assess economic conditions.
Several policymakers, including Chair Jerome Powell, have signaled they prefer to skip a rate hike at the June 13-14 meeting, while still leaving the door open to future tightening if needed.
Economists generally agree the central bank will leave rates unchanged Wednesday, but the next CPI report due in July will play a key role in determining what the Fed will do at that month’s meeting.
“This is a pretty good print in terms of signaling that we are likely to see the core CPI soften materially starting next month,” Omair Sharif, president of Inflation Insights LLC, said in a note.
“The way things are going now, I suspect we’ll see a soft core that will tamp down odds of a July hike.”
Excluding housing and energy, service prices climbed 0.2% from a month earlier, according to Bloomberg calculations, which is more consistent with pre-pandemic trends. The metric was up 4.6% from a year earlier, extending a decline since peaking late last year.
The gasoline price index fell 5.6%. Grocery prices edged higher after falling for two straight months, while dining out got more expensive.
Fed officials will want to see expected price declines in rents and used cars actually materialize before they extend any pause in rate increases.
“There’s progress, it’s encouraging,” said Eric Winograd, chief economist at asset manager AllianceBernstein. “I think it’s enough for the Fed to pause tomorrow….But I don’t think it is enough that we can sound the all-clear.”
